Mt. Gox files for bankruptcy, blames hackers for stealing $480 million in Bitcoins

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Updated @ 12pm, 02/28: Mt. Gox has finally emerged from the shadows… and filed for bankruptcy in its home country of Japan. Mt. Gox said that hackers are to blame for the loss of around 850,000 Bitcoins, totalling almost half a billion US dollars at today’s valuation. The company is roughly $27 million in debt, with almost no assets to its name — thus the bankruptcy. “I think Bitcoin exists today because it has meaning for society,” Mt. Gox’s CEO Mark Karpeles said at a press conference in Tokyo this morning. “Mt. Gox went bankrupt but I hope the Bitcoin industry will last.”

The original story, published on February 25, is included below.

Mt. Gox, one of the biggest names in Bitcoin, appears to have vanished like a specter in the night, and a leaked document claims over 744,000 of customer Bitcoins may have disappeared with it. The Bitcoin community is reeling and still trying to figure out what happened. The recriminations, conspiracy theories, and ranting are only just getting started, but one thing is certain — this is a wakeup call for anyone who thought Bitcoin would have an easy path to general acceptance.

Tokyo-based Mt. Gox got its start as a Magic: The Gathering card trading site. As the fervor over Bitcoin started picking up around the middle of 2010, the site rebranded as a Bitcoin exchange — one of the first such services. Mt. Gox acted as a go-between for people who wanted to turn their Bitcoins into a more liquid currency like dollars or yen. It also had its own custom wallet software that allowed users to manage their Bitcoins online. This, according to the leaked document, was where things went wrong.

The cracks started to show earlier this month when Mt. Gox suspended withdrawals claiming there was a serious flaw with how the Bitcoin protocol verifies transactions. Mt. Gox pointed out it was possible to essentially re-spend a Bitcoin by renaming the transaction before it was synced to the block chain (meaning, after it was verified). The Bitcoin Foundation quickly contradicted Mt. Gox, pointing out that Bitcoin was not at fault. The so-called “transaction malleability” problem was known, but isn’t a huge concern. The Bitcoin Foundation blamed Mt. Gox’s highly-customized wallet software for exacerbating the bug. This may have been the thread that, when pulled, caused Mt. Gox to unravel.

Basically, Mt. Gox didn’t have the Bitcoins it thought it did because its software wasn’t tracking them correctly. The stolen coins were gradually siphoned off from the Mt. Gox hot wallet — the coins being used to process transactions. However, Mt. Gox should have had most of its funds in cold storage where they were safe from the transaction malleability attack. The leaked document claims cold storage was also wiped out, which would mean Mt. Gox was somehow (foolishly) automatically moving coins into the hot wallet as needed.

The validity of the leaked information can’t be ascertained until someone from Mt. Gox provides an update, but it makes the situation sound quite bad. Mt. Gox’s wallet software issues may have been so severe that transaction malleability allowed 744,408 BTC to be stolen over the course of several years. Even after the big drop in value that followed MtGox’s issues, that works out to about $375 million.

All we can say for sure is that MtGox has suspended operations, and users of the site are skeptical they will ever see their Bitcoins again. Mt. Gox might be in the process of rebranding, according to those leaked docs, but there’s probably no way to come back from this even if the scale of the theft is smaller than reported. This is another opportunity to decry the volatility and danger of an unregulated virtual currency — there is no one to come to the rescue when it collapses like this. It also makes a strong case for managing Bitcoin wallets locally.

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